Introduction
ECN211
Macroeconomic Principles
Lesson 7 Quiz
This quiz is worth 30 points.
Answer each of the following multiple-choice questions. Read each question carefully to ensure that you
completely understand it before you select an answer. There is only one best answer for each question;
click the radio button to make your selection.
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Use the Table of Contents and Index in the textbook to help you to quickly locate the correct
answer.
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Question
1 of 30
The idea that supply creates its own demand is known as
the law of supply.
the law of demand.
Keynes’ law.
Say’s law.

Question
2 of 30
According to the circular flow of income and output, saving causes

total output to fall.
consumption expenditures and total output to fall.
consumption expenditures to fall short of total output.
investment spending to fall.

Question
3 of 30
A classical model of the economy predicts
full employment in the long run.
a 15-20% unemployment level whenever the economy is in equilibrium.
the same unemployment rates as the Keynesian model.
cyclical changes in the unemployment rate.

Question
4 of 30
According to classical theory, a shift in aggregate demand will affect
the price level only.
real gross domestic product (GDP) only.
the level of employment only.
both real GDP and the level of employment.

Question
5 of 30
At higher rates of interest
households save less because it is more expensive to save.
households save more because they get a greater return on their savings.
businesses demand more investment because future profitability is likely to be greater.

businesses demand more investment because there are more funds that are available to invest.

Question
6 of 30
According to the Keynesian model, the short-run aggregate supply (SRAS) curve is horizontal when
real GDP is at full capacity, but prices are not flexible.
there are no unemployed resources, and wages do not change when prices change.
prices react to an aggregate demand shock, but real GDP does not.
there are unemployed resources, and prices do not fall when aggregate demand falls.

Question
7 of 30
A decrease in aggregate demand will cause
prices to fall according to classical economists, and unemployment to increase according to Keynes.
prices to fall and unemployment to increase according to both classical economists and Keynes.
aggregate supply to fall according to classical economists, and prices to fall according to Keynes.
aggregate supply to fall according to Keynes, and unemployment to increase according to classical
economists.

Question
8 of 30
According to Keynes, wages are inflexible because
of the minimum wage that is set by government.
of unions and long-term contracts.
workers do not behave in their own self-interest.
the economy is never in the long run.

Question

9 of 30
The short-run aggregate supply curve in modern Keynesian analysis represents the relationship between
the real output of goods and services in the economy and the price level.
the real output of goods and services in the economy and the price level when people have fully
adjusted their behavior.
the real output of goods and services in the economy and the price level when people have not fully
adjusted their behavior.
the nominal output of goods and services and the real output of goods and services.

Question
10 of 30
An upward sloping short-run aggregate supply curve suggests that
real GDP is determined by aggregate supply.
prices and wages are completely inflexible.
prices and wages are completely flexible.
prices and wages adjust in part to short-run demand changes.

Question
11 of 30
Which of the following would increase aggregate supply?
Increased training and education
A reduction in input prices
A discovery of new raw materials
All of the above

Question
12 of 30
The gap that exists when equilibrium real GDP is greater than full employment real GDP is called a(n)
employment gap.

Question
14 of 30
Inflation caused by an increase in aggregate demand not matched by an increase in aggregate supply is
called
demand-push inflation.
demand-pull inflation.
cost-push inflation.
cost-pull inflation.

Question
15 of 30
The significant run-up in oil prices from 2005-2010 was an example of
an aggregate demand shock that increased the price level and increased the rate of growth of real
GDP.
an aggregate demand shock that reduced the price level and reduced the rate of growth of real GDP.
an aggregate supply shock that increased the price level and reduced the rate of growth of real GDP.

an aggregate supply shock that reduced the price level and increased the rate of growth of real GDP.

Question
16 of 30
Consumption goods
include goods such as DVDs that firms hold in inventory.
are only the goods that are bought by households for immediate satisfaction.
include spending on machines and buildings so that goods can be produced in the future.
are goods that are used to make other goods.

Question
18 of 30
How is investment defined as an economic concept?
Investment is primarily the market value of all shares of stock that are held by the public.
Investment is primarily the market value of all equipment, buildings, and inventories that are held by
corporations, partnerships, and proprietorships.
Investment is primarily the sum of expenditures by businesses on new capital goods that will yield a
future stream of income.
Investment is primarily the portion of your savings that is held in an interest-earning account.

Question
19 of 30
Keynesian theory is based on the hypothesis that
saving and consumption are influenced primarily by real current disposable income.
saving is influenced primarily by the interest rate.
planned savings equal planned investment only at full employment.
full employment is automatically attained in any economy.

Question
20 of 30
Autonomous consumption is
consumption spending that is earned rather than transferred from the government.
consumption spending that does not depend on the level of income.
the amount that is spent on consumption when saving equals zero.
consumption spending when the marginal propensity to consume is 1.

Question
21 of 30
The average propensity to consume is the
percentage of total disposable income consumed.
rate at which real disposable income changes as planned consumption changes.
ratio of changes in planned consumption to changes in real disposable income.
slope of the consumption function.

Question
22 of 30
If the marginal propensity to save (MPS) = 0.1, then which of the following is true?
The MPC = 0.9.

Question
23 of 30
The marginal propensity to consume explains how much of the next dollar of disposable income
a household will spend.
a business will invest.
the government will spend.
foreign residents will use to purchase domestic exports.

Question
24 of 30
Which of the following is a true statement relative to retained earnings and investment?
Lower interest rates stimulate borrowing for investment, but have no effect on the use of retained
earnings for investment spending.
Lower interest rates stimulate borrowing for investment, but discourage the use of retained earnings
for investment.
Lower interest rates reduce the opportunity cost of retained earnings, stimulating the use of these
funds in investment.
Lower interest rates have no effect on investment spending at all because investment spending is
autonomous.

Question
25 of 30
In the Keynesian model, whenever planned saving exceeds planned investment
there will be unplanned inventory accumulation.
there will be unplanned inventory depletion.

real GDP will not be influenced.
the interest rate will remain unchanged.

Question
26 of 30
In the Keynesian model, government spending is considered
a positive function of real GDP.
a negative function of real GDP.
to be a negative function of the real interest rate.
to be autonomous.

Question
27 of 30
The multiplier effect tends to
generate instability.
promote stability of the general price level.
magnify small changes in spending into much larger changes in real GDP.
increase the MPC.

Question
28 of 30
A decrease in autonomous investment of $100 that occurs when the marginal propensity to save (MPS)
equals 0.25 will lead to a decrease in real GDP of
$25.
$100.
$400.
$800.

Question
29 of 30
A rise in the price level causes
an increase in aggregate demand.
a decrease in aggregate demand.
a reduction in total planned real expenditures.
an increase in total planned real expenditures.

Question
30 of 30
Suppose that the economy is initially at equilibrium, in which total planned real expenditures equals real
GDP. Which of the following will occur if there is an increase in autonomous investment?
Inventories will increase immediately and production of goods and services will decrease until real
GDP catches up with total planned real expenditures.
Inventories will decrease immediately and production of goods and services will increase until real
GDP catches up with total planned real expenditures.
Both inventories and production of goods and services will increase.
Inventories will not change and production of goods and services will not change either.